ETFs have made it possible for the average investor to get exposure to the world’s currency markets – the largest financial market in the world. Before they came along, investors often had to use futures contracts that involved large amounts of currency.

The first fund launched in late 2005, and it opened up a whole new world for people looking to capitalize on the movements in the foreign exchange.

An excellent article on Investopedia addresses the top issues and questions people might ask about investing in currencies. Among the facts:

• Currencies are not traded on a regulated exchange, there is no central governing body and no arbitration panel to settle disputes. Self-regulation has been very effective, because participants must both compete and cooperate with one another.
• In the foreign exchange market, prices are quoted to the fourth decimal point.
• Technically, you are not buying or selling anything in the currency market. All trades exist as computer entries.
• Currencies are traded in pairs, and when a trade is made, one is always long on one, short on the other.

Not all currency ETFs are created alike. They do track a currency, or a basket of them, from around the world.

Rydex’s line of CurrencyShares are designed to hold cash and invest it with banks to get interest. WisdomTree’s line of Currency Income funds seek to earn current income reflective of the money market rates in the country for which the fund is named. They are not, however, “money market” funds.

ELEMENTS currency exchange traded notes (ETNs) are structured to track the performance of the U.S. dollar vs. the currency named in the fund. For example, if the currency in the fund’s name appreciates relative to the dollar, other things being equal, the value of the fund will increase. Market Vectors currency ETNs give exposure to the exchange rate of foreign currencies.

Note that ETNs differ somewhat from ETFs in their structure as well as tax treatment.

• WisdomTree Dreyfus Japanese Yen (JYF), down 4.8% since May 22 launch
• WisdomTree Dreyfus New Zealand Dollar (BNZ), down 5% since July 8 launch
• CurrencyShares Euro Trust (FXE), up 3.5% year-to-date
• CurrencyShares Mexican Peso Trust (FXM), up 12.2% year-to-date

• ELEMENTS Australian Dollar (ADE), down 3.4% since March 4 launch
• ELEMENTS Canadian Dollar (CUD), down 7.2% since March 18 launch
• Market Vectors Renminbi/USD (CNY), down 2.1% since March 17 launch
• Market Vectors Double Long Euro (URR), down 10.7% since May 22 launch
• PowerShares DB US Dollar Index Bullish (UUP), up 0.2% year-to-date

For full disclosure, some of Tom Lydon’s clients own shares of UUP.

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.